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The Nuttall Review: simplifying share buy backs to encourage employee ownership



United Kingdom

The Nuttall Review: simplifying share buy backs to encourage employee ownership

This article first appeared in Tax Adviser, 1 February 2013

Laurence Lumb, Partner, Field Fisher Waterhouse LLP


In February 2012, the government appointed Graeme Nuttall, a partner at Field Fisher Waterhouse LLP, as an independent adviser on employee ownership. His report, "Sharing Success: The Nuttall Review of Employee Ownership", was published in July 2012 and contains a detailed list of recommendations for promoting the advantages of employee ownership for businesses.

The government is now in the process of implementing the Review's recommendations. This article focuses on one specific aspect of implementation - the proposed company law reforms to share buy backs.  Typically, in private companies with direct employee share ownership, an employee benefit trust ("EBT") operates the internal share market.  The Review's aim is to create a new simpler approach, using share buy backs, to encourage employee ownership but the proposals on which the Government will soon publish its conclusions go wider than this.

Government proposals

The proposals are set out in the BIS consultation paper "Employee ownership and share buy backs" issued on 30 October 2012 alongside a draft implementing statutory instrument expressed to take effect from 6 April 2013.

The intention is to amend the provisions of the Companies Act 2006 identified in the Review as preventing companies from operating an efficient and flexible internal share market. This will make it easier to ensure that the share capital remains in the hands of current, and not former, employees.

The consultation paper divides the share buy back process into three stages:

(i) authorisation of a share buy back;

(ii) financing a share buy back; and

(iii) disposal of the repurchased shares.

The changes envisaged in each area are analysed below.

(i) Authorisation of a share buy back

Currently, a shareholders' special resolution is required to approve the terms of a share buy back contract. In contrast, only an ordinary resolution is required for authorising a "market purchase", where a public company acquires its own shares through a recognised investment exchange.

The consultation paper proposes that an ordinary resolution should suffice in each case. This is said to "level the playing field…and remove some of the administrative costs of organising special authorisation".

The need for a special resolution may deter certain companies from undertaking share buy backs, especially those with a large number of shareholders which wish to use the written resolution procedure. Accordingly, this change would be beneficial. However, its effectiveness, in isolation, may be relatively limited given that:

  • much of the administrative cost and burden arises from the fact of having to pass a shareholder resolution at all, rather than from the type of resolution; and
  • a separate special resolution will still be required if the share buy back is made out of capital (discussed further below) rather than distributable profits.

It would be of greater assistance if a company's directors could be authorised generally, either by the articles of association or an ordinary resolution, to buy back shares in connection with an employees' share scheme from time to time on such terms as they see fit (in compliance with directors' duties), subject only to any exclusions or limitations that the shareholders deem appropriate - such as setting an expiry date, or an upper limit on the consideration payable.

This would remove the need for obtaining a fresh resolution each time that an employee leaves, and could operate similarly to the directors' allotment authorities granted under Section 551 of the Companies Act 2006.

(ii) Financing a share buy back

Payment by instalments

The Companies Act 2006 provides that a company must pay in full for any shares being bought back no later than the time of purchase.

The draft statutory instrument relaxes this requirement for private limited companies purchasing shares in connection with an employees' share scheme (using the existing definition of that term). This would offer companies greater flexibility in financing share buy backs and allow for payment by instalments, which could prove extremely useful in practice.

The consultation paper recognises that the selling shareholders are at risk if the company becomes insolvent before all the instalments are paid, and views are invited as to whether the risks for creditors and shareholders are acceptable, but it is noted that the sellers would have to agree to the arrangement. Also, as creditors of the company, the sellers would rank ahead of the continuing shareholders on an insolvency.

In our experience, this change would provide improved protection for shareholders, who currently have to rely both on the employing company financing an EBT and the trustee of the EBT then making the instalment payments.

It is further questioned whether there should be a prescribed maximum period for completing the payments. The draft statutory instrument does not include one, and it seems preferable for this to be left to negotiation between the parties.

Other financing options

Otherwise, input is sought on increasing the financing options available to companies, with indications that greater flexibility could be given to those which have yet to build up distributable profits.

A helpful step would be to permit private companies to buy back shares out of capital up to a prescribed annual amount without being subject to the applicable formalities (as outlined below). If the amount was limited to the costs and fees generally incurred on such transactions, arguably this would not prejudice creditors.

Presently, shares can only be bought back out of capital by private companies (and never by public companies) where all distributable profits, and all proceeds from any fresh issue of shares for the purpose of financing the buy back, have first been exhausted. Relatively onerous procedures apply, including approval of the capital payment by separate special resolution, obtaining an auditor's report on a directors' statement regarding the company's ability to pay its debts, and publishing prescribed public notices. Further, the capital payment can only be made between five and seven weeks from the date of the special resolution, in order to allow creditors or dissenting members to apply to court for cancellation.

Although this measure would only facilitate a moderate level of share buy backs each year, this may be all that is required by a start-up company which has no distributable profits and would find the cost of the full procedures to be prohibitive.

Share buy backs out of capital have probably been less common since private companies were permitted from October 2008 to make a reduction of capital without court approval, but a reduction of capital still requires a special resolution and directors' solvency statement. It is also less suited to situations where shareholders are entitled to receive a "fair" or "market" value for their shares (rather than just par value), which may commonly be the case for employees, and is not necessarily a direct alternative.

(iii) Disposal of the repurchased shares

The Review found that certain private companies wish to be able to hold repurchased shares for redistribution to other employees. Only the shares of a public company traded on specified exchanges can currently qualify as treasury shares and be used in this way.

BIS therefore proposes a major extension to the existing regime such that all shares in a private limited company may potentially be held as treasury shares. This would be of significant benefit to private employee owned companies as it would no longer be necessary for shares to be "warehoused" in an EBT structure, removing the associated costs and complications.

However, treasury shares have to be bought back out of distributable profits, and shares purchased out of capital would continue to be cancelled automatically. This may reduce the impact of the change, especially for start-up companies which lack distributable profits.

Feedback is requested on whether any consequential transparency or shareholder oversight provisions may be necessary. The forms to be filed with the Registrar of Companies where treasury shares are sold or transferred for the purposes of an employee share scheme will presumably be redesigned for use by private companies from April 2013 (or new forms created).

Further initiatives

Further measures not expressly envisaged in the consultation paper, but which may be useful for employee owned companies, include the following:

Share redemptions

As an alternative to share buy backs, redeemable shares can be issued to employees and then redeemed at the company's option if the shareholder ceases to be an employee in specified circumstances.

A private company can only redeem shares out of capital subject to the same creditor protection procedures applicable on a buy back out of capital. Similar considerations to those discussed above would therefore apply in relation to facilitating redemptions out of capital up to a prescribed amount.

Also, while there is already greater flexibility on redemption payments, it may be helpful to clarify that the phrase "paid on a date later than the redemption date" in the Companies Act 2006 permits a series of payments on separate dates.

Gifts of shares to a private company

Shares can be given back to the company by a shareholder, but the basis on which these may subsequently be disposed of is not dealt with expressly in the legislation, and such shares cannot be cancelled by a private company without undertaking a formal capital reduction. Such gifts are probably not commonplace, but it might be helpful to insert an express power of cancellation for private companies.


The proposals set out in the consultation paper will, if implemented, significantly assist companies in promoting the direct ownership of shares for employees.

It is hoped that interested parties will have responded to the consultation with further ideas and initiatives which can increase the scope and impact of the reforms, especially to simplify authorisation procedures and expand financing options for share buy backs.

The consultation paper and draft statutory instrument are published at:  

There is more information on the Nuttall Review on the Field Fisher Waterhouse LLP tax blog.

For further information, please contact:

Ibrahim Kamara, PR Manager, Field Fisher Waterhouse LLP on 020 7861 4120